8 words. 1 number. 52 characters.
That’s all it took last week for Elon Musk to send the financial media into an absolute frenzy.
Of course, I’m referring to this:
In a letter to Tesla (NASDAQ:TSLA) employees, Mr. Musk laid out his rationale.
Really, what it boiled down is what a distraction the company’s publicly-traded stock has become. Quarterly expectations. Scrutiny from short sellers. Wild swings in the price of the stock. All of which lead to a degree of short-termism that doesn’t jive with the long-term thinking Musk believes in.
Similar to many great business leaders, Musk thinks in years – decades even.
Which is in stark contrast to how many of today’s market participants think. Three-month increments, at most, increasingly are the norm on that front.
To grow Tesla into Musk’s vision, he’s of the mind he’d be better off ridding himself of the quarter-by-quarter hoards and finding a shareholder base that’s more aligned with his mindset.
While Musk turned the financial world on its ear with these 52 characters, a little-known Canadian company actually beat him to the punch.
Back on July 26, Regina based AGT Food and Ingredients Inc (TO:AGT), a company that closed the day before at $13.17 and carried a market cap of just over $300 million, announced that a management-led consortium had made an offer to buy the company and take it private at $18 per share.
This was not a Tweet. This was a real offer.
But unlike Tesla, I bet you’ve never heard of AGT.
Well, our Stock Advisor Canada members sure have as we’ve made AGT a two-time recommendation in the service.
And boy, did the discussion boards within the site ever light up when this news broke. With the conversation continuing ever since.
I must say. I’ve been rather shocked by some of the comments that have come through. Largely because they indicate that even though many of our members own shares in the company, they really don’t know what any of this means. Which is perfectly fine given a big part of our job is meant to take the mystery out of investing.
This mystery, however, is rampant.
Which, by the way, is exactly how many in the industry want it.
But there’s a very simple reason why so much confusion exists.
Investors don’t differentiate between what happens in the stock market and what happens in “reality.” They don’t understand that a single share represents an ownership stake in a living breathing entity. A stake that carries an intrinsic value, despite what the market tells us.
As Ben Graham, one of the fathers of value investing, said: In the short run, the market is a voting machine, but in the long run, it is a weighing machine.
In other words, emotions and feelings of market participants have the greatest pull over short periods of time. Dictating the price of those shares. But when you step back and look over longer periods of time, it’s the business fundamentals that end up being the determining factor of what that ownership position is worth.
Put another way, on the stock market, you will often see wild swings of a stock price. Goodness, one of our Stock Advisor Canada recommendations was up by as much as 40% – ON FRIDAY!
But most of the time, that reflects more the emotions and short-term views of traders rather than the true worth of the company. The true worth of a company doesn’t change all that much over short periods of time.
Sticking with AGT. The company is currently faced with a difficult macro environment. The stock price has been reflective of this. The thing is, it’s a cyclical business. Today’s headwinds are tomorrow’s tailwinds, and management knows this. To the point that they’ve essentially said, “enough’s enough.” Indicating that if those in the market don’t see the value in the company, management will happily take it off their hands. For a song.
Our analysts don’t believe the true value of AGT has not declined anywhere close to what the market says it has. Heck, we believe the company has actually added value in recent years. This is our opinion. Seemingly shared with management, and some of the company’s biggest shareholders. The majority however – and remember, in the short-term the market is a voting machine – disagree.
This is critical to understand: Here’s why!
Understanding this dynamic – the difference between what the market says a company is worth in the short-term and what it’s actually worth – is not trivial. In fact, it might be the most important differentiation you can make when it comes to investing.
After all, this difference can mean the difference between an investor that beats the market, and one that is continually confused by the stock market and left in the dust by fast trading algorithms.
When you, as an investor, understand the difference between what happens on the stock market (emotions, views, opinions) and what happens in the real world (business quality and fundamentals), then you can understand how it’s possible to buy shares of a company for far less than that company is really worth. Just like AGT’s management is trying to do. And Musk is proposing. Maybe.
And when you consistently look for these opportunities to buy when you believe the market has made a mistake, that’s how the best investors have made their fortunes.
As indicated by our two-time AGT recommendation within Stock Advisor Canada, this is exactly what our team – which I head up – tries to do. Recommend companies that we think the market has somehow misgauged.
To be clear, this doesn’t always mean we’re putting forward company’s that are down-and-out. Sometimes the market hasn’t been optimistic enough about a company that’s climbed to great heights. Hello Shopify Inc (TO:SHOP)!
Our formula then is rather simple. The market tells us what it thinks a company is worth. Usually with a one-year or less time horizon in mind, I might add. We do our own work and estimate the true worth of that company through a three- to five-year lens. When we think the market is wrong, we act. The more wrong the better.
Sometimes Mr. Market’s mistake shows up pretty quickly. As with our U.S. recommendations from April and May, up 80% and 21%, respectively, as of Friday.
And just last week the team released our most recent Canadian recommendation. A company that’s seen its stock go for a tumble in recent weeks while business has never been better. In our eyes, a perfect illustration of what we’re after.
Iain Butler,
CFA Chief Investment Advisor
Motley Fool Canada
Disclosure: Iain Butler owns shares of AGT Food and Ingredients and Tesla. David Gardner owns shares of Tesla. Tom Gardner owns shares of Tesla. The Motley Fool owns shares of Tesla.